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Many Americans are clueless on investment product fees

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Since the recent passage of the Department of Labor’s Fiduciary Rule, there’s more scrutiny on advisor fees than ever before. Investment firms and advisors are busy re-tooling to comply with the new legislation, examining their fee structures and contemplating how the changes will affect customer relationships and product sales.

But it turns out that most Americans either believe they don’t pay anything for their financial products, or have no idea what they do pay, according to a study by Hearts & Wallets, a financial research organization that looks at consumer savings and investing behaviors. “Wants & Pricing: What Investors Buy & Competitive Ratings” shows, in fact, that nearly one-third (31 percent) don’t know what they pay for their financial products.

Laura Varas, founder and CEO of Hearts & Wallets, explains why it’s problematic that so many investors are in the dark about costs and fees.

“Everyone knows nothing is free in life,” Varas says. “When you add together the Americans who say they don’t know what they pay for their financial products and the high number of people who say they pay nothing for products that they obtain through their retail financial stores, we have a major problem. Consumers should know what they pay. Some consumers want to pay more for things they want, such as higher service levels, while others do not. The industry has a responsibility to price clearly, and should embrace price clarity enthusiastically by laying out the different choices available to consumers. Regulation has a role, but in the end, there’s no substitute for an informed consumer.”

Hearts & Wallets says that pricing is one aspect of trust, and that an understanding of how investment firms and advisors earn money is the No. 1 trust driver within a financial firm’s control. However, the research indicates that only about 20 percent of consumers clearly understand their financial services providers’ incentive.

“Competition will force traditional financial services firms to confront the pricing issue,” Varas says. “Robo-advisors and other new fintech entrants are explaining pricing clearly and pushing others in the marketplace to do the same.”

The more than 5,000 U.S. households surveyed ranked the top attributes of their financial services providers, investment professionals and advisors. Nationally, the five most important “wants” are:

  • Fees that are clear and understandable
  • Is unbiased, puts my interests first
  • Explains things in understandable terms
  • Low fees
  • Fees that are reasonable for the service provided

“To differentiate services, providers should determine which distinct market segments they want to address,” Varas said. “For example, people close to retirement are more anxious, so the reliability service dimension of ‘is unbiased, puts my interests first’ is much higher than for a millennial.”